Stablecoins, what are they, what are they and how do they work?

stablecoins are a category of cryptocurrencies whose value is anchored to another “stable” asset, an adjective that qualifies these specific digital coins.

They are now often heard of in the global financial context, considering that the entire crypto sector has become a protagonist of the world markets. In this context, stablecoins are increasingly bridging the gap between traditional banking systems and the world of cryptocurrencies.

Having first appeared in 2014, over the years some stablecoins have had to deal with liquidity and stability problems, while others have seen constant growth.

Although Bitcoin remains the most popular cryptocurrency, it tends to suffer from high price volatility. On the contrary, stablecoins aim to solve this problem and try to keep the value of the cryptocurrency stable by anchoring itself to another asset. How do they work?

The following guide clarifies what are stablecoins, what types exist and how they work.

What are stablecoins

Simply put, stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity or financial instrument.

Stablecoins thus aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made investments in digital currencies less suitable for everyday transactions.

Because stablecoins are pegged to reserve assets, they tend to maintain a constant value and do not experience the strong price fluctuations that characterize other cryptocurrencies. This characteristic makes them ideal for payments, savings and remittances.

Most stablecoins are pegged to the US dollar, as it is the world’s reserve currency. However, there are several stablecoins that are pegged to other currencies; for example, EURC is pegged to the euro, GYEN to the Japanese yen, and XCHF to the Swiss franc.

Stablecoin usage has grown in recent years, with the average supply of these digital currencies in circulation increasing by about 28% year-on-year.

The total volume of transfers according to some data published by World Economic Forum reached 27.6 trillion dollars last year, surpassing the combined volume of Visa and Mastercard transactions in 2024.

Types of stablecoins: here’s how they work

The functioning of stablecoins depends on the way in which they keep their value stable (basically the asset to which they are anchored), but the key concept is always the same and can be summarized as follows:

1 stablecoin is equal to 1 unit of another asset (e.g. 1 USDT equals 1 dollar)

Reserve-backed (centralized) stablecoins work like digital tokens backed by real money. A company (e.g. Tether for USDT, Circle for USDC) holds dollars, government bonds or other assets in a bank account. Every time someone buys a stablecoin, an equivalent amount of reserves is “locked”.

Based on the financial asset to which they are linked, we can distinguish three types of Stablecoins:

• Fiat-backed stablecoins: some Stablecoins, to reject the risks of volatility, are anchored to fiat currencies such as the dollar or the euro, or even to gold. The procedure involves the deposit of a sum as collateral - in euros, dollars or pounds, depending on the asset to which the Stablecoin is linked - in a bank account;
• Stablecoins anchored to other cryptocurrencies: some investors wish to break away from the traditional payment structure, and use cryptographic resources as a guarantee of stability. These stablecoins are usually anchored to different cryptocurrencies to mitigate the risks of volatility;
• Non-Asset-Pegged Stablecoins: These cryptocurrencies are not collateralized. Also known as fiat stablecoins, they function like fiat currencies in the traditional banking system: a sort of crypto central bank regulates the supply and demand of cryptocurrency based on rules encoded in a smart contract.

What are stablecoins? The best on the market

The most popular and largest stablecoin by market cap is Tether (USDT), which is pegged 1:1 to the US dollar and backed by reserves. It is also consistently among the top five cryptocurrencies by market cap. You can find Tether on most major cryptocurrency exchanges, including Kraken , Binance , and Coinbase.

These are the best stablecoins on the market:

• Tether (USDT: the largest stablecoin. Launched in 2014, USDT is pegged to the US dollar and is available on several major blockchains such as Ethereum, Solana and Tron. The stablecoin dominates the sector with a market capitalization of over 143 billion dollars.;
• USD Coin (USDC): created by Circle and with a market capitalization of over 58 billion dollars; it is considered very reliable and regularly audited, but centralized and therefore subject to US regulations;
• TRUE USD: created in 2018. This cryptocurrency, pegged to the dollar, uses an erc20 token to be stored in a digital wallet and relies on smart contracts to certify the parity between reserves and issued tokens. Its market capitalization exceeds one billion dollars;
• Pax Dollar (USDP), a stablecoin created in 2018 and supported by the NYSE (New York Stock Exchange) Department of Financial Services, and Digix Gold, a cryptocurrency anchored to gold - a token equal to one gram of the asset - which relies on the Ethereum blockchain

Also worth mentioning in the list of the most widespread and reliable stablecoins are Binance USD , MakerDAO (anchored to the greenback), Stasis EURO (anchored to the European currency) and Paxos Gold (linked to gold).

The advantages of stablecoins?

The main advantage of stablecoins is undoubtedly their stability, made possible by anchoring to another financial asset. Although not completely immune to fluctuations, these coins are less at risk compared to other cryptocurrencies, thus meeting the needs of those who aim to reduce the risks associated with their investments as much as possible.

Furthermore, most cryptocurrency exchanges do not charge any transaction fees when exchanging stablecoins.

This is an aspect that should not be underestimated, especially if you aim to reduce expenses. It is also worth noting that some stablecoins, such as Stasis Eur, meet strict security protocols and are therefore suitable for those looking for a certain margin of safety.

Original article published on Money.it Italy. Original title: Stablecoin, cosa sono, quali sono e come funzionano?